The intertemporal relationship between market return and variance: An Australian perspective

Warren G. Dean; Robert W. Faff

doi:10.1111/1467-629X.00058

The intertemporal relationship between market return and variance: An Australian perspective

Warren G. Dean, Robert W. Faff

Research output: Contribution to journal › Review article › Research › peer-review

8 Citations (Scopus)

Abstract

In this paper we investigate the intertemporal relationship between the market risk premium and its conditional variance in an Australian setting. Using a bivariate EGARCH-M model combined with the dynamic conditional correlation (DCC) framework as proposed by Engle (2000), we find evidence of a positive relationship between the market risk premium and its variance and evidence of two distinct interest rate effects. Furthermore, while the bond market's own variance is not priced by investors, we find that the covariance between equity and bond markets is a significant risk factor that is priced in the market.

Original language	English
Pages (from-to)	169-196
Number of pages	28
Journal	Accounting and Finance
Volume	41
Issue number	3
DOIs	https://doi.org/10.1111/1467-629X.00058
Publication status	Published - Nov 2001
Externally published	Yes

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AB - In this paper we investigate the intertemporal relationship between the market risk premium and its conditional variance in an Australian setting. Using a bivariate EGARCH-M model combined with the dynamic conditional correlation (DCC) framework as proposed by Engle (2000), we find evidence of a positive relationship between the market risk premium and its variance and evidence of two distinct interest rate effects. Furthermore, while the bond market's own variance is not priced by investors, we find that the covariance between equity and bond markets is a significant risk factor that is priced in the market.

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The intertemporal relationship between market return and variance: An Australian perspective

Abstract

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